NZD up more than 1% against the USD, trading above the 0.7500 mark; USD lower as Fed keeps rates unchanged, as expected, and stated that the balance sheet unwind would start soon; AUD lower against the NZD after weak CPI data

By Doug Steel

It was all about the Fed overnight with markets relatively subdued ahead of the 6am decision. In the wash up we see the US yields and US dollar lower. Equities are a touch higher and oil prices have extended gains.

The Fed kept rates unchanged as widely expected. It repeated that balance sheet unwind is to start ‘relatively soon’. September remains likely, if not October. The Fed was upbeat on the labour market progress, but noted that overall and core inflation had declined. A sniff that lower inflation is lingering (although still seen rising to 2%) saw the USD sold post announcement. After floating marginally higher through the night, the DXY US dollar index is now down around 0.6%. USD/JPY dropped toward 111.00 and currently sits around 111.20, after rising toward 112.20 earlier.

EUR/USD jumped post Fed. The single currency was already on the rise following comments by the ECB’s Nowotny saying that the ECB must reconsider policy with deflation risk gone. From around 1.1635, EUR/USD lifted to 1.1650 on Nowotny before stretching up toward 1.1740 shortly after the Fed announcement. The pair currently sits around 1.1720. GBP/USD is up 0.6%, at around 1.3100 on a softer USD. UK Q2 GDP rose 0.3%, meeting expectations.

NZD tops the overnight currency leaderboard, up more than 1%. This morning the NZD/USD briefly popped above 0.7520. Positive risk sentiment, higher commodity prices (including further gains in wholemilk powder futures), and a lack of jawboning for the RBNZ in yesterday’s speech from Assistant Governor McDermott already had the NZD in the ascendency. Indeed, in the speech there was an implication that the NZD is not overvalued given the likes of a positive terms of trade outlook. We agree. That said, there was discussion that a lower NZD would be needed to lower NZ’s external vulnerabilities further and would help to rebalance growth towards the tradables sector. NZD/USD edged higher post speech, reversing some softening beforehand. But it was the post-Fed lunge lower in the USD that saw NZD/USD pop to its highest level since May 2015. The pair currently hovers around the 0.7500 mark, now only a cent below our short term fair value estimate of 0.7600.

AUD was hit yesterday by softer CPI data and RBA Governor Lowe reinforcing that the Bank does not need to automatically follow global peers in removing stimulus. The Governor added that it would be better if the AUD is a bit lower than it is. AUD/USD fell to around 0.7880 late yesterday, before staging a recovery overnight and catapulting higher after the Fed. AUD/USD pierced through 0.8000 following the Fed and sits just under that level currently. NZD/AUD has maintained its rise after yesterday’s AU CPI sitting around 0.9380 this morning.

Oil prices extended their recent rise, adding more than 1% overnight as data showed US stockpiles fell to their lowest levels since the start of the year. A lower USD supported the gains. Brent crude is nudging $US51/bbl, its highest level since late May.

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